The Debt Bubble Fantasy

Good Evening Everyone!

I hope everyone has had a great week. Its great to be back after some needed rest. A market like this can really wear you out. What a volatile week! It appears the market has temporarily come to a fork in the road.

The next step at this level is trying to figure out how bad the recession will be, and how much of it is priced into the market. The "bubble boys" seem to think we are in a bottoming process and are starting to nibble on stocks. The bears think there is a ways to go on the downside. This battle combined with high levels of fear and government intervention has created a market that's dominated by volatility and chaos.

The old saying used to be "bulls make money, bears make money, and pigs get slaughtered". They need to change this saying too "bulls lose money, bears lose money, and pigs get slaughtered (unless you were a a bearish pig)"!

The bulls are losing money obviously because we are down 40+% on the year in the markets. The bears are getting dinged as government interventional bounces continue to suck out trading accounts. As for the pigs? Well if you were a piggish bear, you are probably a millionaire by now!

The problem here is almost everyone is losing money. Hell, even the gold bugs are getting their butts handed to them as gold plummets! When everyone is getting crushed by the market, no one wants to participate because they are full of fear, and they don't trust the system

The bears have had it right in the current cycle, but most are too afraid to hold onto positions because of the constant interventions by the Feds. Many bears were wiped out by the two month mega Bear Stearns rally back in March. The ones left standing are still suffering from PTSD.

Now were there a few bear traders with steel balls who held onto their positions as the market moved down big from 10k to 8k? Yes, but I guarantee you most of them sold out much earlier and missed big profits. I sold many of my positions before getting to these levels because of interventional fear. I luckily held onto a few, but I honestly didn't have faith that the bets would pay off because this market no longer trades on fundamentals.

The stock market now trades based on how the government wants to intervene on any particular day. If they decide to announce a bailout or save a bank, the market rallies. If they stay out of the market for a day, the deleveraging of everything from hedge funds to banks continues and stocks tend to drop sharply.

What you are left with here is a market that is filled with corruption, intervention, confusion, fear, and fraud. As a result, it trades like a giant casino. When you buy a stock or a short ETF these days , you just hope its your lucky news day!

This is no way to invest people! If I want to gamble, I will head out to Las Vegas! This is why I continue to say that the best thing you can do with your money is keep it in cash until things mellow out.

The debt bubble dream world

The bottom line here folks is the debt bubble was nothing but a fantasy.

Lets take a look at incomes as the housing bubble peaked in 2006:

My Take:

Take one look at that graph and you realize that the housing bubble was not created based on fundamentally sound income growth like it usually does in a healthy market. Incomes were higher 8 years earlier in 1998 than they were when the bubble peaked in '2006! How could houses double and triple in value when incomes stayed the same? The answer is they can't.

This fantasy was created by the pigmen of Wall St. It was done via a combination of artificially low interest rates, bad lending standards, and the fraudulent "financial innovation" of leveraged finance on Wall St.

Bottom Line:

We are now entering the next phase of the debt bubble blowup. I will call this the blame game phase. The market attempted to keep the debt bubble fantasy going via huge liquidity injections from the government. This has failed miserably and the market is now realizing it.

Now that the market understands that the game can no longer continue, its time for the fallout. This is where the lawyers will have a field day. It started with AIG and Lehman(Fuld) last week. Today, Greenspan got reemed by Congress for creating this mess via with his horrible low interest rate policies. Expect many more hearings on this debacle followed by criminal trials as the market continues to suffer.

Stocks are now in the process of being repriced as the market accepts the fact that the debt bubble has burst and is not coming back. This is going to take awhile because so much damage has been done. To make things worse and even more confusing, stocks must also be repriced based on the reality that we are now in a recession that will last at least through 2009.

My belief is we still have further to go on the downside. The credit markets are still too tight, and earnings expectations by the analysts are still way too high going forward. I believe that at the least, we will test the S&P lows of the last recession which was around 800.

I expect a lot of choppiness before we get there, and there is a good chance that we head lower from there. The best thing from an investing standpoint is to stay in cash with your core long term assets until we begin too see a trend here. I expect we may trade sideways here for awhile. The range should continue to be large as the VIX continues to stay at elevated levels. Volatility will rule with an iron fist!

If you are a trading addict, use the volatility to your advantage. I have had some good success shorting the interventional bounces that we see on a weekly basis. For example, Monday created a great entry point for some short positions.

Enter these at your own risk, stay nimble, and be prepared to hit the sell button. Take profits and get out quickly on a nice plunge like we had on Tues. This market is fast and profits can be lost in minutes.

Right now I am sitting on the sidelines looking for some better entry points.

Stay Tuned!